Learning from the UK’s Austerity Failure

Posted by Andrew Leigh MP5sc on July 17, 2013

My article in today's Canberra Times looks at the perils of austerity.

Copying UK's austerity cuts sets us on a road to ruin, Canberra Times, 17 July 2013

When the Great Depression hit the United States, US Treasury Secretary Andrew Mellon famously advocated austerity. His formula was simple: ‘Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate…It will purge the rottenness out of the system’.

The theory behind austerity is elegant: proponents argue that government crowds out businesses, and that taxpayers will equate spending cuts today with tax cuts tomorrow. There will be some short-term pain as prices and wages fall, but from cuts will come growth. Austerity sounds great in simplistic theory. The only catch is: it doesn’t work.

Yet today, a conservative government in the UK (in partnership with the Liberal Democrats) are trying austerity. The UK government has cut spending on pension benefits and housing. Teachers, police, doctors, nurses and community workers have had their pay frozen. Public libraries are closing, and more cuts have been foreshadowed. Oxford’s David Stuckler and Sanjay Basu estimate that 10,000 families in the UK have become homeless as a result of the cuts.

UK Labour's financial affairs spokeswoman, Angela Eagle, has argued austerity has ‘hit the poorest hardest’. Katherine Murphy, chief executive of the UK Patients’ Association, reports that patients on oxygen due to breathing problems have seen visits from district nurses reduced, while other patients have been denied operations and painkillers due to the cost, with a nurses’ union warning that the UK ‘is sleepwalking into a crisis’. Unemployment was 5 percent before the crisis, and is now almost 8 percent.

The double tragedy of austerity in the UK, as with every occasion it is put in place is that it has hurt the neediest, and failed to jumpstart the economy. Britain’s recovery from the Global Financial Crisis has been the slowest recovery from any recession in that country since records began: slower than the recovery from the Great Depression and slower than any other G7 country apart from Italy.

That’s because slow growth has effectively negated reductions in debt. As the International Monetary Fund’s Luc Eyraud and Anke Weber have argued, ‘fiscal tightening could raise the debt ratio in the short term, as fiscal gains are partly wiped out by the decline in output’. The situation is akin to a plumber who sells his tools to help pay off the mortgage.

This point has been picked up by thoughtful observers. The UK Budgetary Review Office has warned that cutting will slow economic growth. IMF Chief Economist Olivier Blanchard warns that the UK would be ‘playing with fire’ if it did not do more to stimulate its economy. Princeton’s Paul Krugman likens austerity to a medieval doctor draining a patient’s blood, who, noticing the patient getting sicker, takes more blood.

The contrast with Australia is stark. We avoided recession and saved hundreds of thousands of jobs because the Australian government actively created jobs and benefitted the community through nation building projects such as a once-in-a –lifetime school building program. Australian wages are rising, and inflation remains lower than in the UK. Australia’s debt to GDP ratio is well below Britain’s. As Columbia University’s Joseph Stiglitz likes to quip, Australia’s only contribution to the global slump was the acronym ‘GFC’. As former Prime Minister John Howard remarked, ‘When the current prime minister and the Treasurer and others tell you that the Australian economy is doing better than most – they are right’.

Why does the difference between Australia and the UK matter? Because if the Opposition win government later this year, Britain’s past may be Australia’s future.

In recent months, Tony Abbott has acknowledged ‘The Coalition obviously is looking for significant expenditure reductions.’, and admits that these will be ‘painful decisions’. Queenslanders know what he’s talking about. The savage program of cuts by the LNP government in the midst of an overblown fear campaign about public debt also led to increased unemployment in that state.

Britain’s experience warns us that you cannot cut a nation to prosperity at the expense of the young, the elderly, the disabled and the infirm. If you care about reducing the debt to GDP ratio – as I do – then you need to worry not only about paying down debt, but also about increasing GDP. On economic policy, this election sees Australia at a fork in the road. Coalition austerity would be a rocky path indeed.

Dr Andrew Leigh is the federal member for Fraser, and his website is www.andrewleigh.com.